6/20/2018 Transmission troubles: on inefficient banking system - The Hindu

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Transmission
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JUNE 21, 2018 00:02 IST

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UPDATED: JUNE 21, 2018 00:02 IST

MMA,
Customers & of Indian banks continue to foot the bill for banking system inefficiencies

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Today's he RBI continues to remain unable to influence the effective lending rates in the
Highest
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economy. In February, in its latest statement of intent to resolve poor monetary transmission,
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in a said it would instruct banks to switch base rate customers to the marginal cost of
the RBI
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funds-based lending rate (MCLR) system from April 1, 2018. In April 2016, it had introduced
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the MCLR regime, scrapping the base rate regime, in place since 2010. “Since MCLR is more
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sensitive to policy rate signals, it has been decided to harmonise the methodology of
determining benchmark rates by linking the Base Rate to the MCLR,” it had said. This was
supposed to push banks to lower lending rates. Currently, under the base rate system, the
lending rate at State Bank of India is 8.7%. The one-year MCLR rate is just 8.25%. This
difference of 45 basis points could make a significant difference in borrowing costs, especially
for smaller firms and retail consumers relying on equated monthly instalments. In the RBI’s
assessment, a large proportion of outstanding loans and advances continues to be linked to
the base rate system. This perhaps triggered the February statement.
 
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Yet, the RBI is yet to operationalise that intent. One can understand the
A nudge to
borrowers banks’ reluctance to switch to the lower MCLR-based rates, given the
multiple pressures they face, including record levels of non-performing
assets and losses, and significant treasury losses. The RBI, which has
often faced flak for poor monetary transmission, shouldn’t be swayed by
these concerns. An RBI study estimates that public sector banks could
take a ₹40,000-crore hit on revenue if they allow all base rate borrowers
to switch to the MCLR rate. The RBI, which has just allowed banks to
spread the booking of losses on the treasury front over four quarters — after talking tough
about such rollovers — may not want to hurt them more. But this creates an unfair situation as
new borrowers get MCLR rates while the older ones continue on the higher base rate system.
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6/20/2018 Transmission troubles: on inefficient banking system - The Hindu

While a base rate customer can shift to the MCLR regime only by paying a fee, this outcome is
not too different from the previous attempt by the RBI eight years ago to influence
transmission by shifting to base rates from what was called a Benchmark Prime Lending Rate
regime. There was no sunset clause included then. For troubled banks, this is an asset-liability
mismatch issue. Given the need to revive the economy through consumption and fresh
investment,
Visit Site this impasse needs to be broken.
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MMA, & version | Jun 21, 2018 12:33:20 AM |
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